Reason Foundation

All talk on the Hill is about tax cuts, tax credits, and tax incentives these days. With the fact that massive spending is deemed a foregone conclusion by Democrats and many Republicans, recent negotiations have been over how taxes figure into the stimulus mix. The original proposal from the Obama administration included: allowing businesses to write off extended losses, particularly relating to the economic downturn; giving a $3,000 per worker tax credit to firms that hire new employees (about $1.45 an hour); and the "Making Work Pay" tax credit of $500 or $1,000 to reduce income tax bills. While the latter two aren't the best ideas, in the current climate they are acceptable. However, there is widespread rumor that the tax credit for hiring new workers will be replaced by something targeted at increasing energy-related jobs. But as Congress is now in full swing there has been a lot of debate over these ideas and what new ones should be added in. The New York Times reported Tuesday that the precise details of what amounts to about $480 billion in spending and $320 billion in tax cuts will be hammered out over the next four weeks, with the most arduous haggling and lobbying expected to kick into high gear after the inauguration. A few Congressional Republicans have put forth HR 470, a bill that suggests a wide range of tax cuts and incentives aimed at economic recovery. While the bill itself probably won't reach the floor, Obama's insistence that he will take good ideas from anywhere suggests he might take a few from this proposal. It includes:

• A 5% across the board income tax cut; this is similar to South Korea's recent initiative to slash all tax categories by 2%
• Increasing the child tax credit from $1,000 to $5,000; this would be substantial, but it should not be used to create large refunds
• Making the 15% capital gains rate permanent; it is set to expire in 2010, going back up to 20% (and 40% for dividends)
• Repealing the Alternative Minimum Tax for individuals; Congress has passed temporary solutions to this for a while, they should simply repeal the AMT permanently
• Permanently repealing required withdraw amounts for retirement accounts; letting people manage their own money is always a good thing
• Letting all IRA withdraws be tax and penalty free in 2009; it is good to let people keep more of their money, particularly those who really need it now, though there might be some unintended consequences that come with this proposal
• Increase deductions for education related expenses; HR 470 suggests increasing the deduction by 50%
• Reduce the top corporate tax rate from 35% to 25%; this would put the U.S on par with, of all people, the European Union, which already has been lowing corporate taxes, capital gains taxes to their great benefit and our competitive disadvantage

There are other suggestions in the bill, such as simplifying the capital gains structure, indexing capital gains, increasing write offs, and R&D incentives. These suggestions are finding some bi-partisan support. Rep Charles Rangel (D-NY) who is chairman of the Ways and Means Committee--which handles the tax writing process--said that an AMT fix is almost certain. Sen Chuck Schumer (D-NY) said there was some support amongst democrats for a $3,000 college tuition tax credit that would try to match the deduction proposal. Certain lawmakers have already revealed parts of the stimulus plan that are more or less established. Again according the NYTimes, House and Senate Democrats have tentatively settled on $87 billion in additional aid to help states cover rising Medicaid costs, and $80 billion in grants to cover state and local education expenses. Obama administration officials have reportedly agreed to drop the $3,000 hiring tax credit in favor of of energy-related tax breaks that may total more than $20 billion, including incentives for renewable energy productions and conservation methods. Sen. Debbie Stabenow (D-MI) said she hoped the package would include as much as $2 billion to encourage the production of lithium-ion batteries for use in automobiles. While the tax credit for new employees won't provide enough to stimulate many new jobs, largely because it only covers $1.45 an hour for a new employee which is hardly going to push many employers over the threshold of to hire or not to hire, it at least would be non-discriminatory in the marketplace. Targeting the energy sector skews market resources towards ends that may not be the most productive today. If new energy products are really what is best right now then demand will reflect that--or enterprising entrepreneurs will seek the benefit of pursuing that technology for future demand. Washington D.C. and lobbyists shouldn't try to direct resources through tax breaks in that way.